Treasure Chest | Mar 05 2014
By Greg Peel
Highly geared waste management conglomerate Transpacific Industries ((TPI)) suffered a near death experience in 2008 as did many over leveraged businesses when the GFC hit. How could you go wrong dealing with rubbish? Fund your acquisitions with too much debt. TPI shares fell from $8 in 2007 to under $1 in 2011.
It’s been a trying time in the interim for the company. While waste management may seem like a fairly staple, and thus defensive, proposition the business is in fact cyclical and demand very much tied to economic activity. So not only has TPI spent the last few years trying to repair its balance sheet, it has had to do so into the headwinds of economic sluggishness.
The star performer in recent times in TPI’s suite of assets has been its New Zealand business. This week the company sold this business to the Beijing Capital Group (pending regulatory approval) for A$880m. While selling off the crown jewels may be a desperation measure, it should for TPI be its last desperation measure. Indeed the sale, which brokers consider to be at a reasonable price and reflective of a recovering NZ economy, should prove transforming.
Transpacific released its first half result in mid-February which revealed that at the end of December, the company had net debt of $754m and step-up preference shares worth $250m. A combination of preference share redemption and the NZ asset sale will leave the balance sheet virtually debt free.
After over five years, the world may now be Transpacific’s trash heap once more. The repaired balance sheet allows TPI to now consider acquisitions and even the resumption of dividends. CIMB suggests there are now “multiple angles for further earnings growth and multiple [PE] re-rating”.
CIMB already had an Add rating on TPI going into the result release and on news of the asset sale has underscored that rating enthusiastically. To CIMB, the stock has become even more compelling.
Macquarie is another broker retaining a Buy-equivalent (Outperform) rating on TPI post the asset sale. Macquarie echoes CIMB in highlighting TPI’s new lease of life and growth options, but also warns the missing factor as yet is a cyclical upturn in domestic activity. Following the NZ sale TPI is now an Australian only company, although this does allow it to focus its efforts. UBS (Buy) suggests management’s ability to extract value from the core Australian operations could positively surprise over the medium term.
A slightly more cautious JP Morgan (Neutral) agrees TPI’s balance sheet is in the healthiest position it’s been for five years, but the broker wants to now learn what management’s plans are before reconsidering its recommendation.
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